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As JPMorgan Readies Earnings, London Whale Back In Focus

Equity investors favored the most beaten-up banks in 2012, pushing Bank of America way out ahead of its peers in a strong year for the market at large as the potential for a big earnings comeback won out. That was a contrast from 2011, when the fortress balance sheets and more predictable earnings power of firms like JPMorgan Chase and Wells Fargo drew more buyers.

Bernstein analyst John McDonald says in a note Tuesday that the outperformance in 2012 “came from investors feeling better about many tail risks…and an improving housing market as a driver of earnings recovery for banks.”

Which banks will set the tone this year is still unclear, but clues may be in the offing this week as the industry’s biggest institutions report results from the fourth quarter.

JPMorgan is on tap Wednesday, with much of the buzz ahead of its results focused on the looming release of an internal report into the bank’s London Whale trading disaster. DealBookreports that Chairman and CEO Jamie Dimon is among those who have pushed the board toward going public with its findings, even as those findings appear likely to lay some blame at his feet (and impact his compensation).

Shares of JPMorgan gained 1% Tuesday, and are up 5.4% year-to-date, having recouped all of their losses following the May 10 disclosure of the massive trading blunder. Joining JPMorgan on the earnings calendar Wednesday is Goldman Sachs, with results from BofA, Citigroup and Morgan Stanley to follow before the week is out.

Aside from whether investors choose to value potential earnings growth over profit stability, McDonald thinks there may also be some differentiation this year based on capital return. BofA and Citi seem likely to resume returning capital to shareholders, after having previous attempts rejected by the Federal Reserve in 2011 and 2012, respectively, while JPMorgan, Wells Fargo and other institutions with more robust balance sheets may be in a position to increase buybacks or offer fatter dividends.

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